In our new International Tax Competitiveness Index, the United States ranks 32nd out of the 34 countries in the OECD. This puts the United States behind countries such as Spain and Italy and just in front of Portugal and France.
There are a few main drivers behind the U.S.’s low score in the ITCI. There are the obvious ones: the U.S. has the developed world’s highest corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rate at 39.1 percent and it is one of six remaining OECD countries that taxes corporate income no matter where in the world it’s earned.
But there are also some less obvious factors for the U.S.’s poor ranking.
The United States has higher than average, progressive, top marginal income tax rate at 46.3 percent (federal and state average). This is higher than income tax rates in countries like Belgium, the United Kingdom, and Norway. It is also more progressive than income taxes in Germany, Finland, and Sweden. (In Sweden, the top tax rate applies to income above $88,180 whereas, in the U.S., the top rate applies to income above about $400,000.)
The U.S. also has above average taxes on capital gains and dividends. When looking at both federal and average state taxes, the United States taxes capital gains at a top marginal rate of 28.7 percent, which is sixth highest in the OECD. The story is much the same for dividends. The U.S. has the 9th highest top marginal dividend tax rate in the OECD at 28.6 percent.
Finally, the U.S. ranks poorly on property taxes. This is due to the U.S. estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax. , and the poor structure of state and local property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es.
The largest issues with the U.S. tax code are due to the federal tax system. States are constantly searching for ways to improve their tax codes, with governors from both parties enacting meaningful reform in the last year. But there is only so much states can do. If the U.S. wants to compete on a global stage, the federal tax code will need to change. A lower corporate tax rate, lower tax rates on investment, and a shift to a territorial tax systemA territorial tax system for corporations, as opposed to a worldwide tax system, excludes profits multinational companies earn in foreign countries from their domestic tax base. As part of the 2017 Tax Cuts and Jobs Act (TCJA), the United States shifted from worldwide taxation towards territorial taxation. would be a good start.
